With the stock market at elevated levels (even accounting for the recent sell-offs), finding stocks on sale is difficult. Earnings multiples are stretched and interest rates are rising, which is generally bad news for the stock market. It's times like this when investors most need viable alternatives.
Those options to consider should include a look at three real estate investment trusts (REITs) that are solid companies in out-of-favor sectors. All were hit hard by the coronavirus pandemic, but all are also now in the final stages of recovery.
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1. New Residential Investment: Its dividend is yielding 9%
New Residential (RITM 1.24%) is a mortgage REIT that has a number of different businesses, including mortgage origination, mortgage servicing, and mortgage investments. Mortgage REITs have struggled as markets sense the Fed's changing view on interest rate hikes will be a negative for mortgage-backed securities. This is generally true; however, not all mortgage-backed securities behave the same.
The most interest-rate sensitive mortgage-backed securities are those guaranteed by the U.S. government. These are the securities the Federal Reserve has been buying. While New Residential holds these, it also holds a lot of mortgages that aren't guaranteed by the government. These securities pay a higher rate of interest and are much less affected by interest rate movements. Finally, New Residential owns a lot of mortgage servicing rights, which go up in value as rates rise. It also services mortgages for other lenders, which provides fee income.
In October, New Residential raised its quarterly dividend five cents a share to $0.25 per share. This gives the company a dividend yield of 9%. Mortgage REITs and mortgage originators are highly unpopular right now, however, New Residential might be more suited for the upcoming interest rate environment.
2. SL Green Realty: Focusing on New York City properties
SL Green Realty (SLG -2.31%) is an office REIT that concentrates on New York City properties. It is Manhattan's biggest office landlord, with 61 properties and just over 28 million square feet of office space. Like most REITs, SL Green was dented by the pandemic as many businesses struggled and occupancy numbers fell. Second, many of SL Green's properties had retail spaces that struggled to make rent as tourism disappeared and consumer spending fell.
Given that SL Green operates in some of the most expensive office space in the world, investors have feared that businesses will reduce office space and/or move out of Manhattan to the suburbs. The fear of a mass work-from-home movement is probably overstated, however; employees love it, but bosses do not. While the omicron variant has pushed back full office reopenings, it is only a matter of time.
SL Green pays a monthly dividend of $0.303 a share, which gives the company a dividend yield of 4.5%. It also paid a special dividend in December of $2.75 per share, which combined works out to be a 7.8% yield. Manhattan office space isn't going anywhere, and SL Green pays a decent dividend while you wait.
3. Tanger Factory Outlet Centers: Back on the rise again
Tanger Factory Outlet Centers (SKT 1.28%) is an operator of outlet malls and is nearing the end of a multi-year turnaround. Like most retail REITs that focus on consumer discretionary products, the company was leveled by COVID-19 and retailer bankruptcies. The company was highly indebted to begin with, and the pandemic nearly pushed it over the edge.
In 2020, Tanger suspended its quarterly dividend; however, it reinstated it in 2021. The dividend is lower than it was pre-pandemic, but the company just increased it in October, and it now yields 3.8%. The company reported that traffic in the third quarter of 2021 was more or less where it was pre-pandemic. Tanger may have had a near-death experience, but it looks like it is has turned the corner.
